European PMI’s diverge, as stronger UK data highlights ongoing inflation concerns

The FTSE 100 has kicked off the day on the back-foot, with mainland European indices outperforming in the wake of the latest PMI releases. Declines across French, German, and eurozone composite PMI surveys highlight the continued lack of economic growth in the region, pushing the focus back to the ECB. However, Christine Lagarde appears unconcerned despite the lack of growth and near-target inflation, with her surprisingly hawkish assessment standing in stark contrast to the Federal Reserve. Nonetheless, markets continue to take Lagarde’s words with a pinch of salt, as the ECB are currently on course to see both sub-2% inflation and negative growth when they take their March monetary policy decision. With that in mind, markets continue to look for a first rate cut in March, kicking off a potential 125-basis point decline for ECB rates over the course of 2024.

The UK PMI data helped bolster growth hopes in the region, allaying fears that have emerged in the wake of the recent October GDP figure of -0.3%. Our reliance upon the services sector has helped drive expectations for a year-end recovery for UK growth, with the impressive 52.7 services PMI figure boosting the wider composite gauge to a six-month high of 51.7. However, this may not be exactly what the BoE want to see, with a sharp rise in services sector operating expenses highlighting how strong wage demands are keeping inflation expectations elevated. While markets currently see a coin toss between four or five rate cuts next year, the persistent underlying inflationary pressures will undoubtedly give greater need to take a higher-for-longer approach at the Bank of England.

Overnight data from China has helped boost hopes of a resurgence for the country, with the Hang Seng enjoying a 2.38% rise. A rebound in retail sales (10.1%) and industrial production (6.6%) helped feed expectations of a recovery in the region, setting aside credit and real estate concerns for now. Understandably, the strength seen in Chinese industrial activity will encourage investors in the mining space, with Anglo America, Rio Tinto, and Antofagasta all pushing higher on the expectation of increased demand and thus higher prices. While we are yet to see a particularly strong rebound for AUD and NZD, the potential for a recovery in this key export market does provide the basis for potential strength going forward.